With the international supply chain going “off the rails” in a such a spectacular manner, it’s worth taking a close look at how we arrived at this sorry point. Could the current situation have been avoided? Probably not. This has major negative implications for international trade in the long run.

When it comes to complex supply chains, variability is the enemy. In a finely-tuned transport machine that spans oceans and borders, introducing variability in any location ricochets down the supply chain, often getting amplified with every step, in what is commonly referred to as “the bullwhip effect.” But between climate change, geopolitical competition, pandemics, and other “black swan” events, it seems that disruption is becoming the new normal.

As it is currently constructed, the international supply chain is composed of a large number of independent entities, each seeking to optimize their piece of the pie, without much regard to the overall product. For example:

• Shippers, acting individually, seek to meet the requirements of their respective businesses but often end up reaching for the same solution, creating concentrated tidal waves of volume that overwhelm capacity.
• Ocean carriers exercise their new-found market power by attempting to match shipper demand as closely as possible. But the resulting stew of blanked sailings followed by surges of extra loaders is instituted without regard for downstream consequences. Landside components such as ports, chassis suppliers, rail carriers, and dray truckers are left to deal with the ebbs and flows as best they can.
• Ports are ensnared in a welter of competing requirements. Their primary customers, the ocean carriers, choose individual terminals based on lowest lift costs and fast vessel turns. But other powerful influencers such as labor, environmental, community, and connecting rail/truck carriers restrict the flow of cargo through what should be a “flow-through” facility.
• Chassis lessors look to maximize utilization of what is becoming a much more expensive asset. There is not much incentive in the system for them to build large amounts of surge capacity into their fleets.
• Railroads continue to pursue the mantra of Precision Scheduled Railroading, which focuses on operating ratio. Trains are as long as possible and annulled when the required traffic to fill them is not available. Operations are “right sized,” terminals are closed, and assets are shed. Terminals are operated by contractors who are generally selected in a competitive process with focus on lowest lift cost and not on their servicing dray carriers.
• Drayage carriers struggle to retain scarce driver capacity and maintain productivity while being buffeted by terminal congestion and sometimes capricious changes in schedules or requirements imposed by the larger players in the chain.
• Shippers respond to lengthening and uncertain transit times by shipping earlier, adding to the backlog. Fixed warehouse capacity and unloading crews are taxed by variable and unpredictable arrivals of loads, increasing equipment dwell times.

At the core, a difficult problem exists. Most participants in the industry do not have the ability to regulate the amount of freight that flows into them at any moment in time. This is a key difference versus the trucking industry. An individual trucker will generally only take on the number of loads which it can fulfill. It is left to the shipper to place the excess. This may result in delays in when the load moves and the shipper ending up paying a higher price. But generally once the load is underway, it proceeds to destination in a predictable manner.

In contrast, the only participant in the international intermodal supply chain that has the power to say no is the ocean carrier, and there is no incentive for them to turn down freight if they have the capability to handle it. Downstream participants are not consulted and are left to their own devices to handle the outcome.

Congestion ‘kills’ capacity

In a tightly interconnected network business, congestion kills capacity. Once you pass the congestion tipping point, productivity drops, at just the time when you need increased throughput to work down the backlog. In terminals, container stacks grow and working room becomes scarce. Empties can’t be accepted because there’s no place to put them. Precious lift machine time and manpower are consumed picking through the stacks to get at the next “hot load.”

The effects of the situation are then passed along to downstream elements of the chain, and eventually rebound back towards the source. For instance, the empty flow of containers back to origin is disrupted, creating a shortage of capacity at origin. And so on.

The current situation would have been much improved had the flow of freight been regulated at the source overseas, rather than what actually occurred, which was the ocean carriers dumping the maximum amount of volume that they could manage into the North American intermodal system. If the flow of cargo had been throttled at origin, even to a limited extent, it would have enabled all the components of the inland chain to continue to operate more normally, and a far greater amount of cargo could have flowed through than we are currently seeing.

Of course, that is a pipedream, because the mechanisms for such actions do not exist, nor does the near-term incentive. It would be a mistake to judge that the current situation is simply a one-off problem that will eventually “go away” with business returning to the previous normal. Long-term damage is being done right now to the offshoring equation. The potential cost savings provided by overseas production are dwarfed by the costs of stock-outs and the inability to get goods to the market in anything like a timely manner.

After the dust settles on this calamitous year, supply chain strategies will be reassessed. Change will come. Given the size of the problem, the change will be slow, but it will also be inexorable. Import TEU growth will recede down to levels below that of the freight-producing sector of GDP. This will collide with the wave of new capacity currently on order. It’s going to be interesting.